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I have long been an admirer of yours. It began back in 2003 when I first received a copy of your report on MBIA questioning its triple-A status. Though a lot of the content and terminology contained in it was unfamiliar and difficult to understand at the time, I immediately considered it one of the best pieces of research to ever be published on Wall Street. In closely following your career since then, I have always held in high esteem both your investing acumen, and your comportment. Though some others ridiculed your publicity-seeking nature, I recognized the important role that it played in your advocating for change, and the resulting performance numbers that you attained. It’s frequently the way things need to get done when investing in many publicly traded companies in the 21st century, and you did it better than most everyone.

In addition to your omnipresence, I also admired your tenacity in fighting established and well-funded corporations. Whether it be MBIA or Canadian Pacific, you played an essential and influential role in the capital markets, and they are better off for it (though regressing in so many other ways). I didn’t always agree with some of your investment choices, but if you had a position in a company, I would not even bother taking the other side based on my intuition, knowing that your due diligence was maniacally thorough.

Then came Herbalife. The thoroughness was certainly evident, and at this point the rest of the investment community (and press) had caught on to your brilliance, and deservedly gave you center stage to announce your thesis. While there had always been a lot of questions surrounding the company, you brought a new spin to it, which while quantifiable1, also required a regulatory effort to put the nail in the coffin. This was a perfect mix for your skills. First, you and your team laid out a succinct road map for public officials and prosecutors to follow in shutting down Herbalife. Then, you masterfully utilized PR, media, and lobbying to make sure that government agencies and politicians would be incentivized and/or compelled to root out any fraud.

In my quest to understand both sides of this story, I came across John Hempton’s detailed post about visiting a Herbalife nutrition club in Queens. In reading it, I started wondering if there weren’t considerably more pernicious financial schemes plaguing immigrants and the poor? While I personally may find the underlying business model of Herbalife distasteful and of no economic value, the American view of huckster-like sales tactics is a mixed one. Think of P.T. Barnum on the positive side, or maybe the dual impression of the word ‘chutzpah.’ Using my own standards, I may take issue with Disney World helping to part the lower quartile from their money in a less than judicious manner, but I’d never make the case it should be shut down. Nevertheless if you could convince the authorities to close Herbalife, I wouldn’t shed a tear.

Fast forward almost three years since the beginning of your HLF fight, and I open up my Sunday New York Times in early October and read an article entitled “Valeant’s Drug Price Strategy Enriches It, but Infuriates Patients and Lawmakers.” Heretofore I had always been curious about your long thesis on Valeant, but never had the time to analyze the company closely. Moreover, I had never seen any VRX presentation where you detailed the thesis as succinctly as say, MBIA. After reading the NYT story, I understood why:

And consumers like Bruce Mannes, a 68-year-old retired carpenter from Grandville, Mich., are facing the consequences.

Mr. Mannes has been taking the same drug, Cuprimine, for 55 years to treat Wilson disease, an inherited disorder that can cause severe liver and nerve damage. This summer, Valeant more than quadrupled its price overnight.

Medicare will now have to cover about $35,000 for the 120 capsules he takes each month, and he will have to pay about $1,800 a month out of pocket, compared with about $366 he paid in May.

“My husband will die without the medicine,” said his wife, Susan, who is now working a second part-time job to help pay for health care. “We just can’t manage another two, three thousand dollars a month for pills.”

Cuprimine is just one of many Valeant drugs whose prices have spiked as part of the company’s concerted strategy, which has richly rewarded its investors and made it one of Wall Street’s most popular health stocks.

In a nutshell, what’s good for Valeant, is really bad for Bruce Mannes - and anyone else in his position.Upon finishing the article, I wasn’t sure that buying other pharmaceutical companies and greatly boosting prices on the newly acquired drugs was the sole rationale behind Pershing Square’s thesis to take an enormous position in Valeant, but it was enough for me to have no further interest in the company. In the back of my mind I had a feeling I wouldn’t like what I saw, but it left me with a nagging question “How does Bill Ackman reconcile his moral crusade on Herbalife, with his championing of the management and strategy of Valeant?”Continue reading →

roughly ‘what % of revenues were sold internally to distributors?’ [↩]